H2O RETAILING CORPORATION FY2027 Q1 Earnings Report

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Executive Summary

The Company reported higher revenue and higher earnings in Q1, with Operating Income and Ordinary Income posting significant growth. However, Net Income was boosted by the one-time gain on the sale of investment securities, which should be taken into consideration. Revenue was nearly flat at ¥1,645.4B (+0.5% YoY), while Operating Income improved significantly to ¥72.8B (+32.2% YoY) and Ordinary Income to ¥80.7B (+31.4% YoY). Quarterly Net Income attributable to owners of the parent was ¥102.6B (+157.9% YoY), and EPS was ¥89.75 (+172.9% YoY). The primary driver of earnings growth was an improvement in gross margin in the Department Store Business and Commercial Facilities Business, while the ¥51.6B extraordinary gain (gain on sale of investment securities) contributed to the increase in Net Income.

Factors Affecting Business Performance

【Revenue】Revenue was ¥1,645.4B, nearly flat at +0.5% YoY. The sales composition of the three major businesses, which totaled ¥1,571.5B, was Supermarket Business 62.2%, Department Store Business 28.7%, and Commercial Facilities Business 9.1%, indicating a high degree of dependence on the Supermarket Business. While the Department Store Business generated revenue of ¥451.7B (+7.9% YoY) and the Commercial Facilities Business generated ¥142.8B (+4.7% YoY), the Supermarket Business recorded lower revenue of ¥977.0B (-3.5% YoY), which restrained overall growth.

【Profit and Loss】Operating Income was ¥72.8B (+32.2% YoY), and the Operating Margin improved by approximately +1.0pt to 4.4% from 3.4% in the same period of the previous year. Gross margin also improved by +1.6pt to 46.4% from 44.8% in the previous year, indicating that the primary driver of earnings growth was improved profitability rather than top-line growth. By segment, Operating Income in the Department Store Business increased to ¥57.6B (+66.9% YoY; margin 12.8%), while the Commercial Facilities Business increased to ¥18.3B (+18.1% YoY; margin 12.8%), both growing with high margins and driving company-wide earnings. In contrast, the Supermarket Business continued to report lower earnings at ¥17.4B (-24.6% YoY; margin 1.8%), partially offsetting the improvement in the other businesses. Ordinary Income was ¥80.7B (+31.4% YoY). After deducting extraordinary losses of ¥13.0B (losses on disposal of fixed assets, etc.) from extraordinary gains of ¥51.6B (gain on sale of investment securities, a one-time factor), Profit Before Tax was ¥119.3B. Quarterly Net Income attributable to owners of the parent was ¥102.6B (+157.9% YoY), including the boost from the extraordinary gain, and therefore grew faster than the underlying business earnings growth reflected in Operating Income (+32.2%). This point should be considered when evaluating normalized earnings power. In conclusion, the Company reported higher revenue and higher earnings.

Segment Analysis

Of the three reportable segments, the Department Store Business and Commercial Facilities Business reported higher revenue and higher earnings, while the Supermarket Business reported lower revenue and lower earnings, creating a clear contrast among the businesses. The Department Store Business generated revenue of ¥451.7B (+7.9% YoY) and Operating Income of ¥57.6B (+66.9% YoY), with a margin of 12.8% (a significant improvement YoY), serving as the core contributor to company-wide earnings. The Commercial Facilities Business also generated revenue of ¥142.8B (+4.7% YoY) and Operating Income of ¥18.3B (+18.1% YoY), maintaining a margin of 12.8% and contributing as a high-margin business. In contrast, the Supermarket Business generated revenue of ¥977.0B (-3.5% YoY) and Operating Income of ¥17.4B (-24.6% YoY), with a margin of 1.8%, indicating deteriorating profitability. As the segment accounts for the largest share of company-wide revenue (62.2%), its declining profitability is a structural factor limiting the upside of the overall Operating Margin.

Key Financial Indicators

【Profitability】The Operating Margin improved to 4.4% from 3.4% in the same period of the previous year, while gross margin rose to 46.4% (44.8% in the previous year). At the same time, the SG&A ratio increased slightly to 41.9% (41.4% in the previous year). Accordingly, the primary driver of earnings growth was the improvement in gross margin exceeding the increase in the SG&A ratio. The Net Profit Margin, based on Net Income attributable to owners of the parent, was 6.2%, including the contribution from the extraordinary gain. 【Cash Flow Quality】Accounts receivable and notes receivable were ¥741.5B, resulting in DSO of approximately 41 days based on Revenue. Inventory of ¥210.9B corresponded to approximately 22 inventory days, indicating no significant change in the level of funds tied up given the business structure. 【Investment Efficiency】ROE was 3.3% (quarterly basis), which remains low from a capital efficiency perspective. Given total assets of ¥6,804.8B and the limited scale of Revenue, there is room to improve asset efficiency. 【Financial Soundness】The Equity Ratio (excluding non-controlling interests) improved by +1.0pt to 44.4% from 43.4% in the same period of the previous year. The current ratio was 85.5% (current assets of ¥1,568.8B / current liabilities of ¥1,834.1B), below 1x, indicating that the short-term funding structure requires monitoring.

Cash Flow Analysis

As details of the statement of cash flows were not provided, a review of funding trends based on balance sheet changes indicates that cash and deposits were ¥421.6B, down -27.1% from ¥578.1B in the same period of the previous year. At the same time, investment securities were ¥757.8B, down -20.1% from ¥947.9B in the same period of the previous year, consistent with the recognition of the ¥51.6B extraordinary gain (gain on sale of investment securities). Accounts payable were ¥683.4B, down -9.7% from ¥756.8B in the same period of the previous year, which may have represented a source of cash outflow on the payment side. Treasury stock was ¥241.4B, up +19.1% from ¥202.7B in the same period of the previous year, suggesting that cash needs related to shareholder returns contributed to some extent to the decline in cash balances. Overall, while the Company is reducing its investment assets, cash on hand is also decreasing, and the allocation of funds is at a stage that will influence future funding trends.

Quality of Earnings

The earnings growth for the current period reflects contributions from both an improvement in recurring earnings power and one-time factors, and these should be evaluated separately. Operating Income of ¥72.8B (+32.2% YoY) represents recurring improvement driven by higher gross margin in the underlying business. In contrast, the ¥51.6B extraordinary gain (gain on sale of investment securities) included in Profit Before Tax of ¥119.3B is a non-recurring factor, accounting for approximately 43% of Profit Before Tax. Of the ¥13.9B in non-operating income, dividend income of ¥8.2B accounted for approximately 59% and can be regarded as a relatively stable source of income. Meanwhile, comprehensive income was -¥4.8B, of which the portion attributable to owners of the parent was -¥12.3B, representing a gap of approximately ¥114.9B from quarterly Net Income of ¥102.6B. The primary cause of this gap was a valuation difference on securities of -¥125.8B, indicating that market fluctuations in held shares, an external factor unrelated to the operating business, affected the Company’s financial position separately from Net Income.

Earnings Forecast and Guidance

Progress in Q1 against the Full-Year plan was 23.1% for Revenue (¥1,645.4B/¥7,120.0B), 22.4% for Operating Income (¥72.8B/¥325.0B), and 24.5% for Ordinary Income (¥80.7B/¥330.0B). All were slightly below the simple one-quarter progress benchmark of 25%. In contrast, progress in Net Income, on an attributable-to-owners-of-the-parent basis, was 44.6% (¥102.6B/¥230.0B), significantly above the benchmark. However, this was due to the temporary boost from the ¥51.6B extraordinary gain and does not directly indicate the pace of achievement for the Full-Year Net Income plan. While the Full-Year Ordinary Income plan calls for a -4.4% YoY decline, Q1 Ordinary Income increased +31.4% YoY. Accordingly, changes in the earnings pace toward the second half of the fiscal year will be a key point of focus in monitoring future progress. As of the current quarter, no revisions have been made to the earnings forecast or dividend forecast.

Shareholder Returns

The Full-Year dividend forecast is ¥48 per share, implying a Payout Ratio of 24.0% based on the Company’s EPS forecast of ¥199.99. Although Q1 Ordinary Income performed strongly at +31.4% YoY, the growth in Net Income benefited significantly from the extraordinary gain. Therefore, the appropriateness of the dividend plan needs to be evaluated in light of recurring earnings trends from the second half onward. Treasury stock increased +19.1% YoY to ¥241.4B, which may reflect activity related to shareholder returns. However, the disclosures available for the current quarter do not provide confirmation of the implementation status of treasury stock purchases.

Risk Factors

1. Deterioration in Supermarket Business profitability: Revenue was ¥977.0B (-3.5% YoY), Operating Income was ¥17.4B (-24.6% YoY), and the margin was 1.8%. Profitability has declined in this core business, which accounts for more than 60% of company-wide revenue. The degree of improvement in this business will determine the trend in the company-wide Operating Margin.

2. Declining short-term liquidity: The current ratio was 85.5% (current assets of ¥1,568.8B / current liabilities of ¥1,834.1B), below 1x, while cash and deposits declined -27.1% YoY to ¥421.6B. Continuous monitoring of the short-term funding structure is required.

3. Dependence on extraordinary gains: The ¥51.6B extraordinary gain (gain on sale of investment securities) accounted for approximately 43% of Profit Before Tax of ¥119.3B, and part of the growth in Net Income (+157.9% YoY on an attributable-to-owners-of-the-parent basis) resulted from a non-recurring factor. Investment securities declined -20.1% YoY to ¥757.8B, and attention should be paid to the reproducibility of similar one-time income.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Return

The Company’s Operating Margin and Net Profit Margin both exceed the median for the retail industry, indicating that profitability is relatively high within the industry.

Growth and Capital Efficiency

The Revenue Growth Rate is significantly below the industry median, indicating that the pace of top-line expansion is relatively slow within the industry.

※Source: Compiled by the Company

Key Points in the Earnings Results

1. The improvement in Operating Margin (4.4%, +1.0pt YoY) represents a structural change driven by growth in the high-margin Department Store Business and Commercial Facilities Business. This resulted from the improvement in gross margin (+1.6pt) exceeding the increase in the SG&A ratio (+0.5pt).

2. The significant increase in Net Income (+157.9% YoY on an attributable-to-owners-of-the-parent basis) was heavily influenced by the one-time ¥51.6B gain on sale of investment securities, which accounted for approximately 43% of Profit Before Tax. The 44.6% progress rate for Full-Year Net Income likewise includes this one-time factor and should be considered separately from growth in recurring earnings power.

3. The decline in revenue and earnings in the Supermarket Business (Revenue -3.5%, Operating Income -24.6%) and the current ratio of 85.5% are points requiring confirmation of progress in structural improvement in future earnings results.

Theoretical Stock Price (Reference Value)

This is a mechanically calculated reference range based solely on publicly disclosed data using a residual income model (Ohlson-type model with an explicit 5-year fade period). It is not a forecast of the market stock price or a recommendation to take any specific investment action.

Sensitivity: ¥2,623–¥2,779 at Cost of Equity ±1%, and ¥2,695–¥2,701 at ω±0.1.

Notes:

• Because progress in Net Income against the Full-Year forecast (45%) exceeds the standard benchmark (25%), Forecast EPS has been adjusted upward within a maximum range of +10% (because companies with leading progress tend to outperform their forecasts; adjustments may be excessive for businesses with strong seasonality).
• Because forecast ROE is below the Cost of Equity, the theoretical value is below Book Value Per Share.
• Net assets as of the end of the quarter are used (there is a timing difference from the Full-Year forecast).
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Calculation model: Residual Income Model / Interest Rate Reference Month: 2026-06 / This value does not predict or guarantee the future stock price)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings release data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly available earnings data. Investment decisions should be made at your own responsibility, after consulting a professional as necessary.

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